Thailand’s unsustainable boom is piling up risks

Thailand is booming again, but the foundations of its growth revival are wobbly. Unless policies and politics become more robust, the Southeast Asian nation’s economy may find its momentum hard to sustain.

While this year’s expected GDP growth rate of about 5 percent is close to the economy’s potential rate of expansion, the quality of growth is suspect. A subsidy for first-time car buyers saw a jump in auto loans last year. A 30 percent increase in unsecured personal lending prompted a recent warning from the Bank of Thailand about the growth of household debt.

Farmers, meanwhile, are getting a state-sponsored income boost. The government is buying their rice crop at above-market prices for a second year at an estimated annual fiscal cost of 1 percent of GDP. The spending priorities are lopsided. The construction of a $12 billion water management system, which could prevent the recurrence of 2011 floods, is unlikely to start this year.

The Bank of Thailand is not a “big supporter” of consumption stimulus, says Prasarn Trairatvorakul, the central bank governor. The monetary authority chief is also mindful of the hard slog ahead in doubling per capita income to $10,000 a year, the minimum required for Thailand to become a rich nation.

Escaping its middle-income trap will be difficult because the country is running out of cheap labour. About 10 percent of the workforce consists of immigrants from Myanmar. More opportunities for them at home could mean higher costs for Thai companies, says Kampon Adireksombat, a TISCO Securities economist in Bangkok.

A 23 percent minimum-wage increase and a drought in the agricultural belt in the north and northeast could lift inflation this year above the central bank’s estimate of 2.8 percent.

The biggest risk for investors, though, is politics. In the 17 months that she has been in power, Prime Minister Yingluck Shinawatra has not pushed too hard for an amnesty for her brother and former prime minister, Thaksin Shinawatra, who was ousted in a 2006 military coup and is currently living in Dubai. But there is always a risk of a tactical mistake that will put pro-Thaksin “red shirts” and anti-Thaksin “yellow shirts” on a collision course. Unless Thai politics becomes more stable, the government will have little interest in boosting competitiveness and every incentive to carry on giving people a good time.

Context News

Thailand’s central bank will raise its assessment of GDP growth this year from its current estimate of 4.7 percent, Prasarn Trairatvorakul, the governor of the Bank of Thailand told Reuters in a Jan. 15 interview.

Domestic demand will underpin growth and exports will pick up laer during the year, he said.